February 28th, 2018
Market Volatility Clouds the Long-term View
The stock market is whipsawing, interest rates are rising and the bitcoin bubble could pop any day now. In a period of short-term tumult, it is easy to be distracted from the long-term outlook for the economy and the building industry in particular.
Fortunately, the recently appointed chair of the Federal Reserve, Jerome Powell, has reaffirmed his view that short-term volatility will not distract him or the Fed from its plans to stave off inflation by gradually increasing interest rates. It’s true that in the near term, higher interest rates and resulting higher mortgage rates have dampened home sales somewhat. Home sales trended downward in December and January, with much of the blame falling on higher mortgage rates.
It is true that the cost of home ownership increases when mortgage rates rise or – as has also been the case – when home prices increase. However, we must remember that the other side of the home-affordability coin comes in the form of the average consumer’s ability to pay. In this regard, the picture looks brighter. We created 200,000 jobs in the U.S. economy in January, beating expectations. Wages are also rising. The millennials are seemingly gravitating back to the aspiration of home ownership that has always predominated in the U.S. and, just as importantly, they are making meaningful equity contributions when buying a home. Millennial home buyers are seen putting 10 to 20 percent down when buying a home, a great source of stability in avoiding the next housing bubble.
In summary, it’s important to maintain our view on the longer term picture, which looks extremely robust. Jobs are plentiful and wages are increasing to help home buyers address higher home prices and interest rate costs. The rising price of homes is driven more by a shortage of lots than buy speculators armed with recklessly granted mortgages. And higher interest rates, while they cause short-term dislocations, will provide the Fed with its most important tool to use in future soft patches: the ability to cut rates to spur growth.
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